Climate-ControlWhat it means for your business and your bottom line

Feb 28, 1998

Climate-Control

What it means for your business and your bottom line

By Dan Curtis

Using the existing ceiling system for a conversion.

Writing this article prompted me to take a look back at what has been said in the past
about climate control in self-storage. In the '80s, little was mentioned about climate
control other than the fact that it could be used with conversions, probably because those
buildings were already equipped for heating and cooling in their prior use. For that
reason, conversions have always been the easiest way to add climate control to storage.

Converted buildings were usually located in a high-density area with heavy traffic. The
obsolete use may have been a result of positioning by major retailers such as Wal-Mart or
Kmart. Positioning is the real-estate practice of moving to the closest possible location
to serve your projected market, which may change as new shopping malls, subdivisions and
apartments are constructed.

Another change that created buildings subject to conversion was the creation of the
"Super Store." In the mid-'80s, Wal-Mart, Kmart, Home Depot and Lowes were
satisfied to locate in facilities of 60,000 to 100,000 square feet. Now they are locating
in 150,000 to 200,000 square feet, handling an even bigger inventory. Grocery stores and
other retailers have done the same. These converted buildings have caused
developers--including everyone from Public Storage, Shurgard and Storage USA down to the
single project developer--to seriously consider using climate control.

Definition

Mechanical equipment unit with lowered door for ventilation.

"Climate control" refers to keeping the temperature below 90 degrees in the
summer and above 40 degrees in the winter, with humidity below 65 percent to stop mold or
mildew. Most operators use 50 degrees in winter as a low and 80 degrees to 82 degrees as a
high in summer. The old myth of maintaining 72 degrees in both the winter and summer is
costly and not expected or necessary for the average tenant. Keep the above in mind as it
will be dealt with later.

Building Design and Codes

Single-story or multistory buildings are equally suitable for climate control. As land
costs go up, the need to build multistory buildings increases. Multistory buildings are
more efficient and cheaper to heat and cool, and tenants don't seem to mind loading their
possessions on an elevator. Try to keep the distance from the entrance to any one unit 120
feet or less, although many projects have been opened with distances up to 200 feet
without problems.

One elevator is required for each 40,000 square feet of multistory use, with a maximum
of three elevators. Remember that for every 100 units, only eight are visited each day;
therefore, of 500 full units, only 40 will be visited on any given day. This usage
represents very low or minimal use for an elevator when compared to any other building
type. And, access to all floors is usually not allowed by the security system, so tenants
can only access the floor their unit is on.

Always remember that floor load for self-storage is 125 pounds per square foot. This
storage load is almost twice what is required for office-type buildings. Hallways are
usually not figured in this loading as no storage is allowed in them.

As storage increases in height, fire and other safety codes are more strict. Fire codes
are interpreted differently depending on the jurisdiction. Start working early with the
building officials. The cost of items such as sprinklers, fire alarms, smoke alarms, fire
doors, firewalls, and access windows or exits can be very high.

Unit Mix

The average unit mix for conventional outside units and climate-controlled units is
about the same. It varies from an average of 90 square feet in inner-city locations to
about 130 square feet in rural locations. Industry experts who claim tenants don't rent
large units are simply wrong. Over and over again, climate-control projects run completely
out of bigger units.

Demand

Demand is generated by several demographic and market factors. High disposable income
generates the demand to store electronics, furniture, art and other valuable items. The
comfort factor may be an important reason why the experienced storage customer selects
climate-control storage.

Facilities in business areas have strong storage demand for items such as records,
furniture, fixtures and retail inventory. Accessible sites to highly traveled roads or
freeways offer a justification to store sales samples, vending supplies and
semi-perishables. Salesmen with retail items such as cosmetics, pharmaceuticals and
drug-store items may require a controlled environment.

Other Benefits

Climate-control spreads the market appeal to a wider range of tenants, probably
reducing financial risk for the owner. It serves as a draw for new customers who have
never used storage before because it lends a sense of security. These new tenants tend to
stay longer and to have very low rent delinquency. Climate-control storage also uses land
more efficiently. Multistory buildings may use more than 100 percent of the land--a fact
that keeps low land cost per unit.

Financial Considerations

To determine the cost of offering climate control at a facility, add about 15 percent
to the basic building cost. The extra cost is in the HVAC mechanical system and the
additional insulation. Liner-wall or double-wall partitions are used to protect
insulation. Proper construction planning must be used to prevent schedules from being
extended--it doesn't have to take longer to complete a climate-control building. Don't
forget to add the additional utility costs, but they may not be as high as you might
anticipate. A cost study was done in the South that indicated a utility cost of 25 to 30
cents per square foot per year, using 8 cents per kilowatt hour as the energy cost.

With the temperature range mentioned earlier, design A/C loads at 1,250 to 1,500 square
feet per ton. This figure is about one third of the requirement for a house or apartment.
By undersizing the HVAC units, you do a more effective job of humidity control. The
operator who sets his thermostat at 70 degrees to 72 degrees gets very near the dew point
in summer. This will result in the humidity being above 65 percent, and mildew will cause
trouble. Energy costs in multistory buildings can be lower, as only the top floor gets
heat from the roof. Two-story, over-and-under buildings built into a hillside are also
very efficient for both heating and cooling.

Well-designed buildings will be 75 percent to 80 percent efficient. If the design of
unit mix indicates anything below this, the floor should be redesigned. If there is a
large percentage of smaller units, it may be difficult to reach 75 percent efficiency.
That is because small units require more hallways, which lowers efficiency.

Revenue

Climate-controlled facility with a driveway through center.

Revenues may vary greatly in different parts of the country. If education of the
benefits have not sparked demand, rates may stay low. As soon as customers realize the
benefit, rates can be raised. Eventually, rates will be 20 percent to 60 percent higher
for climate-control units. Since large units are renting well, it is suggested that the
rates for these units be raised more than those for smaller units. In the past, large
units have been discounted. This is not necessary in today's market.

If resistance to price is encountered, "value marketing" is suggested. In
value marketing, the operator rents the units farther from the entrance for a little less.
When the facility is full, he can raise the rates informally. Don't be afraid to change a
premium for more conveniently located units.

The Bottom Line

Of course the goal of every owner is to fill up his project. In this process, watch
gross rental income to get near maximum potential income. Not counting expenses, how can
gross potential be reached or exceeded? Consider the possible answers:

Increase rent.

Increase available storage.

Add climate control.

Numbers two and three above, along with fill-up, will allow rent to increase due to
demand. It is not unusual for these three factors to double gross rental potential without
raising expenses. That means these increases go to the bottom line. In turn, the value of
the project (defined by dividing net operating income by the cap rate) is often 50 percent
to 100 percent higher. (Cap rate is net operating income divided by value of the property.
Currently, cap rates are in the 9.5 percent to 12 percent range.) Climate control adds
significant value to the project.

The Keys to Success

More than any other storage, climate-controlled storage benefits from marketing. Those
businesses and sales representatives must be contacted. The apartment managers and condo
agents must be called on or contacted. Since 1994, self-storage has been rapidly expanding
with climate-control. As land get more expensive and harder to find, there will be much
more climate-control in the storage market.

Dan Curtis is vice president of Doors and Buildings Components Inc. (DBCI). Based
in Douglasville, Ga., the company provides the self-storage industry with roll-up steel
doors, filler panels, partitions and complete hallway systems, as well as other services.
Mr. Curtis, a 30-year veteran of the self-storage industry, is a frequent contributor to
Inside Self-Storage and a well-reputed speaker at Inside Self-Storage Expos. For more
information, Mr. Curtis may be reached at (800) 542-0501.